By Jonathan Pearlman For The Straits Times In Sydney
AUSTRALIA'S banks have the world's highest exposure to home mortgages and have been warned to rein in lending to avoid a crisis caused by falling property prices.

The warning was sounded in a new report by Moody's Analytics, which said Australian home prices are overvalued and present a "major concentration risk" for the nation's banks. The report said home prices are most likely to fall slowly, but a crash remains a possibility.

It said home loans make up 65 per cent of Australian bank lending, compared with 35 per cent in the United States and less than 20 per cent in Germany and Britain. The report likened Australia's property market to the overhyped mood in the US before its mortgage crisis in the mid-2000s and said that a strong correction would be dire for Australian banks.

"It would take a bold economist... to declare that an Australian housing correction was impossible."

Australia has a "banking oligopoly", with about 85 per cent of the A$1 trillion (S$1.14 trillion) in mortgages controlled by the country's top four banks. They have been the world's most profitable for the past three years and have reaped a bonanza from their hold on the mortgage market. The four are due to make a collective profit of A$26 billion this year.

According to figures for May released by Australia's banking regulator, the country's biggest bank, Commonwealth Bank, has a mortgage book worth A$320 billion, followed by Westpac (A$297 billion), NAB (A$196 billion) and ANZ (A$178 billion).

However, most analysts believe the country is not experiencing a housing bubble, though the issue remains hotly contested. Property prices have been largely stagnant since their peak in 2010 but had soared in the preceding two decades. The growth, particularly from 1996 to 2010, far exceeded global norms. In the past year, prices have risen 2.6 per cent but this is believed to have been due in part to growing demand from Chinese and foreign buyers.

A report last month by Citi Research said prices may rise by 3 per cent to next March and then fall slightly, due to China's slowdown, a weaker Australian dollar and reduced Chinese migration.

Prominent economist Saul Eslake, from Bank of America Merrill Lynch, said he did not believe a housing bubble was likely.

"I think households, particularly those who already have some debt, will continue to prioritise paying debt down over taking out new debt," he told the Property Observer website.

"(This) will inhibit non-first home buyers, while first home buyers are likely to remain apprehensive about their employment prospects and hence wary about entering the market."

Unemployment in Australia has risen to almost 6 per cent this year and there are concerns about the impact of the end of the decade-long mining boom, but the housing sector remains assisted by a shortage of housing stock in major cities and historically low interest rates.

The Moody's report said information on whether Australians are able to repay their debts remains sketchy because the country's banks provide only minimal data on consumer credit performance.

However, it said, while the end of Australia's China-fuelled mining boom may cause an economic slowdown, a severe crash in the economy and the property market appears unlikely.

"A crash will likely be avoided, provided the US continues to recover and the Chinese economy does not implode," it said.

"As Australia transitions from a mining-led resources boom back to a more traditional growth path focused on housing, retail and manufacturing, the performance of the economy may feel bad, but in reality, it will simply be a return to normal."

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